There is more misunderstanding amongst both solicitors and clients in the area of Deeds of Variation than in almost any other area of private client work.
It is often said that a deed of variation ('DOV') rewrites a person's Will after their death – this isn't actually the case and is where a lot of confusion arises.
The law regarding DOVs is quite straightforward – it is contained in s142 of the Inheritance Tax Act 1984 ('the Act') which provides
(1) Where within the period of two years after a person’s death—
(a)any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied, or
(b)the benefit conferred by any of those dispositions is disclaimed,
by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.
(2) Subsection (1) above shall not apply to a variation unless the instrument contains a statement, made by all the relevant persons, to the effect that they intend the subsection to apply to the variation.
A disposition means a transfer of ownership. So, in simple terms, where a disposition has taken place on a person's death, the recipient of the disposition can redirect that disposition to another recipient. Providing this is done in writing within two years of the death of the deceased, and providing the writing contains a statement that sub-section 1 of the the Act is to apply, then the redirected disposition will be treated as a disposition by the deceased for the purposes of the Inheritance Tax Act 1984.
So essentially a DOV is a tax planning device. If, for example, you are an already wealthy 65 year old who has just inherited £100,000 from an elderly relative, you might feel that the inheritance is only going to increase the Inheritance Tax payable on your own death. So if you do a DOV in favour of your children, for Inheritance Tax purposes it will as if you had never inherited the £100,000 and your children had inherited it directly from your elderly relative.
Queries frequently arise in relation to DOVs and almost without exception they can be answered by reference to s 142 of the Act as quoted above. Examples of such questions are:
My relative died intestate and I've inherited money from him under the intestacy rules. Can I do a DOV in favour of my children?
Yes, any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) can be varied.
I've inherited some money from a relative and I want to redirect it by way of a DOV to my children. However, the executors of my relative's estate won't co-operate or sign anything.
It has nothing to do with the executors and they don't need to be involved. The Act refers to a variation by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions. You inherited the money and are therefore the only person who has benefited from the disposition. So you are the only person who needs to be a party to the DOV.
(NB The executors would in fact need to be a party to the DOV if the DOV resulted in additional tax being payable, but that would be the case only in the rarest of circumstances e.g. a widow who has received a disposition spouse exempt from Inheritance Tax making a variation in favour of non-exempt beneficiary resulting in Inheritance Tax becoming payable.)
My husband has just died and we owned our house as joint tenants so I automatically inherited his half by way of survivorship. Can I retrospectively sever the joint tenancy and do a DOV redirecting his half of the house to my children?
As a matter of law you can't retrospectively sever a joint tenancy (even though the standard DOV precedents used by solicitors purport to do just this- this isn't an error, but it perhaps makes things clearer for clients).But you don't need to sever a joint tenancy to make a DOV – remember, the Act refers to any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise). When your husband’s share of the house passed to you by way of survivorship, this fell into the category of or otherwise in the Act.
So the disposition of your husband's share of the the house to you can be varied in a DOV. The same could be done in respect of any jointly held asset e.g. a jointly held bank account. (But beware inheritance tax doesn't become immediately payable.)
My husband has just died and we owned our house as joint tenants so I automatically inherited his half by way of survivorship. I am worried that the house will have to be sold to pay the fees if I have to go into care. Can I do a DOV redirecting his half of the house to to my children or to a trust so that his half of the house will be protected if I go into care?
The Act says the redirected disposition will be treated as a disposition by the deceased for the purposes of the Inheritance Tax Act 1984.The rules for charging for residential care have no connection with the Inheritance Act 1984, so the rules of deliberate deprivation will still apply. So you might as well transfer your late husband's half of the house to your children or to a trust in the normal way – there would be no advantage in doing it by way of a DOV.
This is a good example of why it is a fallacy to say that 'a DOV rewrites a Will'. It does, but only for the purposes of the Inheritance Tax Act 1984.
Can I change the executors of my late husband's Will in a DOV?
No, the Act only refers to dispositions. The appointment of executors is not a disposition. Another example of how a DOV doesn't 'rewrite a Will'.
Can I create a trust in a DOV?
Yes, providing you are varying a disposition in your favour to the trust. The DOV becomes the trust deed.
Do I do a DOV before or after the executors have paid me from the estate?
Either. Subsection (6) of s142 of the Act provides that the rule applies whether or not the administration of the estate is complete or the property concerned has been distributed in accordance with the original dispositions.
Do I need to notify HM Revenue and Customs that I have done a DOV?
What formalities have to be followed when drawing up a DOV?
Very few. It must be within the period of two years after a person’s death, it must be by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions and it must contain a statement, made by all the relevant persons, to the effect that they intend the subsection to apply to the variation.
So as long as it
- is made within two years of death
- is in writing
- contains a statement that subsection 1 of s142 is to apply
it is a valid DOV.
It does not need to be a deed or signed as a deed. H M Revenue and Customs in its Inheritance Tax Manual states that it will accept a DOV in the form of a letter signed by the beneficiary.(See http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM35022.htm.)
The document must identify the original disposition and the way in which the disposition is varied. So the following would be a perfectly valid DOV:
This variation is made by me John Smith of 1 Dalton Road Melchester.
Mary Smith of 2 Hall Road Melchester died on 2 March 2010. In her will she left me a legacy of £100,000. I redirect that legacy to my daughter Helen Smith. I intend that the provisions of section 142(1) of the Inheritance Tax Act 1984 shall apply to this redirection of that legacy.